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AWS and Alexa Drive Amazon to Lofty Heights

Amazon investors expecting solid growth got more than they expected.

Just when you think Amazon.com, Inc.(NASDAQ:AMZN) had few surprises left, the company pulls out a doozy.

For the just completed 2017 fourth quarter, the e-commerce giant generated revenue of $60.5 billion, which grew 38% year over year. This was at the top end of the company's forecast of $56 billion to $60.5 billion, and powering past analysts' consensus estimates of $59.99 billion. Even excluding the favorable impact of exchange rates produced growth of 36% over the prior-year quarter.

It didn't stop there. Amazon's operating income of $2.13 billion increased 69% year over year and soared past the company's forecast for a range of $300 million to $1.65 billion. Amazon produced net income of $1.86 billion that grew 148% year over year, resulting in earnings per diluted share of $3.75, up 143% over the prior-year quarter and more than doubling analysts' expectations for $1.85 per share.

To be fair, net income benefited from recent U.S. tax reform to the tune of $789 million, but even excluding that from the results, Amazon produced net income of $1.07 billion and earnings that grew 40% to $2.15 per share.

This cloud has a silver lining

Amazon Web Services (AWS) continues to be the star of the show. Revenue from the cloud computing segment crested $5.1 billion, up 45% year over year and beating analysts' consensus estimates of $4.98 billion. Operating income for the segment grew 46% year over year, and up 51% when adjusting for exchange rates. AWS continues to subsidize the expansion of Amazon's e-commerce business, producing 10% of the company's revenue and all of its operating income for 2017.

Amazon shared some other highlights from the year. The Fire TV Stick and Echo Dot were the best-selling products across all of Amazon for 2017. The company said that its Prime member loyalty program saw more than 5 billion items shipped worldwide in 2017, and that more members joined Prime in 2017 than in any previous year. The company has never revealed how many customers subscribe to the program, which provides free shipping as well as streaming video and music.

Amazon's original movie The Big Sick was nominated for an Academy Award, while original series The Marvelous Mrs. Maisel won two Golden Globes. Its AI-infused convenience store Amazon Go opened early this year, combining computer vision, machine learning, and sensor fusion to automate the shopping experience and eliminate the checkout process.

Amazon also mentioned its partnership with Berkshire Hathaway Inc. and JPMorgan Chase & Co. "to address healthcare for their U.S. employees, with the aim of improving employee satisfaction and reducing costs."

Amazon plans to double down on Alexa. Image source: Amazon.com.

What management had to say

While executives typically address a company's performance during the quarter or year in the earnings press release, Amazon CEO Jeff Bezos chose to focus on Alexa, the digital assistant that controls its lineup of voice-activated speakers. "Our 2017 projections for Alexa were very optimistic, and we far exceeded them," he said. "We don't see positive surprises of this magnitude very often -- expect us to double down." He went on to point out that Alexa now possesses more than 30,000 skills and can control more than 4,000 home devices.

Looking ahead

Amazon expects net sales for the 2018 first quarter to be between $47.75 billion and $50.75 billion, which would represent growth of 34% to 42% year over year. The company is forecasting operating income in a range of $300 million to $1 billion, compared with $1 billion generated in the first quarter of 2017.

Amazon continues to roll out Prime around the globe and expand AWS into new regions -- including France and China during the quarter. The company said it plans to open 12 additional "Availability Zones" across four regions between now and 2019 -- on top of the 52 zones in 18 regions it operates now.

This shows that the growth has only just begun for Amazon. The powerful combination of e-commerce, AWS, and Prime, augmented by streaming video and artificial intelligence, provide a variety of avenues for progress -- and Amazon is pursuing each one.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Danny Vena owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

Author

Daniel W. Vena, CPA, CGMA is long-term investor searching for intangibles that provide explosive growth opportunities in his investments. He served on active duty with the US Army and has a Bachelors degree in accounting.
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